What Is Risk-Reward Ratio in Trading?
Risk-reward ratio compares what you risk to what you aim to gain on a trade. How to calculate it, why it matters more than win rate, and how it exposes weak signals.
Last updated: 2026-05-29 ยท Reviewed by the editorial team
Key takeaways
- Risk-reward ratio compares the distance to your stop-loss with the distance to your target.
- A high win rate can still lose money if the average loss is larger than the average win.
- Knowing your risk-reward lets you work out the win rate you actually need to break even.
- Signals that quote results without risk-reward are hiding half of the picture.
How to calculate risk-reward ratio
Risk-reward ratio is the relationship between the amount you stand to lose if a trade hits its stop-loss and the amount you stand to gain if it reaches its target. If you risk one unit to make two, your ratio is one to two, often written as an R of two.
To find it, measure the distance from your entry to your stop-loss, which is the risk, and from your entry to your target, which is the reward, then divide the reward by the risk. The ratio describes the structure of the trade, not a prediction that it will work.
- Risk is the distance from entry to stop-loss, in price or in account currency.
- Reward is the distance from entry to the target you actually plan to take.
- R is reward divided by risk; an R of two means two units gained for each one risked.
Why risk-reward matters more than a win rate alone
A win rate on its own is misleading because it ignores the size of each result. A trader can win most of the time and still lose money when the occasional loss is far bigger than the typical win. The reverse is also true: you can win less than half your trades and still grow an account when your winners are much larger than your losers.
This is why a channel that advertises a high win rate but never mentions risk-reward is showing you only the flattering half of the story. The number that sells is rarely the number that decides the outcome.
The break-even win rate trick
Risk-reward lets you turn the question around. For a given ratio there is a minimum win rate you need just to break even before fees. With an R of one you need to win more than half the time. With an R of two you only need to win about a third of the time. With an R of three, roughly a quarter.
A quick way to estimate it is one divided by one plus R. Once you know the break-even point you can judge whether a strategy or a signal is realistic, and you can see immediately when a headline result depends on winning far more often than the structure of the trades would allow.
- R of one to one: break-even win rate is about fifty in a hundred.
- R of one to two: break-even win rate is about a third.
- R of one to three: break-even win rate is about a quarter.
Risk note: This guide is educational and is not financial advice. Crypto trading is high-risk. Never trade with money you cannot afford to lose, use position sizing, and remember that past performance does not guarantee future results.
FAQ
What is a good risk-reward ratio?
There is no single correct number. Many traders look for at least one to two, meaning they aim to gain twice what they risk, but a lower ratio can work with a higher win rate. What matters is that the ratio and the win rate are consistent with each other.
Is risk-reward ratio more important than win rate?
Neither works alone. A win rate without risk-reward hides the size of losses, and a risk-reward target without a realistic win rate is just a hope. You need both numbers, measured over a meaningful sample, to judge a strategy.
How does risk-reward help me evaluate a signal service?
It lets you check whether a service's claims are internally consistent. If a provider advertises frequent wins but uses tiny targets and wide stops, the risk-reward may be so poor that the approach loses money despite the high win rate.